Wednesday, May 30, 2012

Good Comments

Reading through some of last weekend's commentary got me thinking about what I look for most -- and try to emulate -- in good economic commentary.

One of the first lessons we learn in econ 1 is that economics has a lot to say about incentives, which are usually ignored by popular discussions, and economists have a lot less to say about fairness, morality, or distributional questions, which is what popular discussions focus on. I don't mean that fairness or distributional questions are unimportant, just that economists don't have any special insight into those questions.

For example, an economist contributes best to the tax debate by pointing out margins that others have not noticed, such as the huge implicit marginal tax rates implied by phase-out provisions or the incentives for old people to save vs. consume when looking at confiscatory marginal estate taxes.

Economists need always to disinguish tax rates from taxes. Whether "the rich" should pay more or less overall is really not that useful for us to comment on. Whether a code attempts to raise revenue with high marginal rates and lots of deductions or low marginal rates and few deductions is something we can say a lot about. We need to remind people of econ 1, that who pays the tax and who bears the burden of a tax are often radically different. "Corporations" never pay taxes, they pass taxes on either to customers, workers, or investors.

Economists should focus on the things they know something about. Economists who pontificate on the moral character of public figures are not saying anything about which they have any particular standing or expertise to analyze. It takes a lot of ego to think your political passions are that much more interesting than anyone else's.

More deeply, seeing some people as good and others as
evil really is not that useful as social science or as a contribution to policy debate. Our ancestors in the middle ages knew how to do that. If you want to understand why people do what they do, why policies are formed as they are, it is much more useful to view people who disagree with you as well intentioned but mistaken -- we can't all study economics all our lives -- than as evil, or in the pay of dark powers.

Economic analysis is more believable when it is non-partisan. I like commentators who make an effort to find silliness (and there is plenty of it) attached to both parties. When I see an analyst that always seems to be plugging one of the political parties, I know he'll be shading the truth at least half the time. Even people who are partisan function most usefully by holding their own party's actions to scrutiny, rather than sanctifying any action on one side and demonizing any action on the other. Most hilarious are commentators who laud a policy action when their pet party does it, and demonize exactly the same action when undertaken by the other side.

And economists should insist on precise language. When political discussion uses the word "drastic cut" to mean growing expenses by 5% where before the government was planning to grow expenses by 7%, our job is to remind them what "cut" means. So much economic discussion really belongs on my favorite game, bullshit bingo.

By now you will probably guess that what set me off is Paul Krugman's announcement in the New York Times that in his exalted opinion New Jersey Governor Chris Christie is a "big fiscal phony," that Congressman Paul Ryan and candiate Mitt Romney are "fakers," who are "willing to snatch food from the mouths of babes (literally, via cuts [sic] in crucial nutritional aid programs)," all to serve the dark conspiratorial interests of their "financial backers."

This column illustrates just about every desirable principle by embodying its opposite.

Update:

There actually is a lot economists can add to the distribution debate. There are a lot of facts: the widening distribution comes from a skill premium, not inherited wealth. It's new people getting rich, not the old rich keeping more money. It's pretax income, not the rich keeping more money. Consumption inequality is much less than income inequality. And so on. There's a lot of good theory: Optimal redistribution with incentive and participation constraints is great stuff. And both theory and experience on how well tax-based redistribution works out. I just meant we don't have much to add to the mostly normative questions. (Thanks to the "Lumpy Economist" Ruediger Bachmann for pointing this out.)

And lots more principles for economics come to mind.

There's always a supply curve and a demand curve. Most discussions assume one away.
Budget constraints. The trade and capital account must balance.
Higher prices and interest rates can reflect good times not just signal bad times.

24 comments:

It would be great if you could analyze the budgets of Paul Ryan and Mitt Romney on your blog and show the likes of Paul Krugman that they are not "big fiscal phonies" and do not have "magic asterisks" everywhere. I (and perhaps other readers) would find it more productive.

As a current recipient of government aid, I can attest that social safety nets distort the incentive to work (http://gregmankiw.blogspot.com/2009/11/poverty-trap.html). In my few months on aid, I have learned of many cases of fraud. More sadly, I have heard stories about mothers becoming pregnant solely to increase benefits. Baby making is becoming the income source of the very poor. When one woman was told by her "case worker" that her soon-to-be additional child would not qualify her for more cash assistance because she had used up all of her benefits with her previous children, she pointed to her pregnant belly and said "you mean I'm having THIS for nothing?"

It seems like a broken system to me. Why we as a society feel good about subsidizing behavior like this seems perplexing? Why not spend time educating the poor to be more productive members of the society and to become more intelligent consumers? Intelligent consumption can enable you to live well on less than the poverty line. Buying lotto tickets, etc. is a sure way to make living at the poverty line miserable.

I first began admiring Paul Krugman when I read an excellent column of his in Slate defending the WTO against ridiculous leftists raging against "globalization."

Written in 1999, that column dates from the days, as my international trade professor says, "back when Paul Krugman was an economist."

The central flaw in your reasoning, Prof. Cochrane, is that you're assuming that Paul Krugman is still an economist. Maybe he is in the classroom, but in his public writings, he could be more accurately described as a left-wing pundit with economic training. And the definition of a pundit is someone with enough ego to think that his political passions are more interesting than anyone else's.

I think the most compelling evidence of Krugman's hackery is his blatant, repeated calls for fiscal stimulus when he has essentially conceded that the Fed adopting a NDGP level target would automatically provide the necessary monetary stimulus to bring the economy back to full employment. Why call for increased deficits and increased government distortion of the economy when proper Fed policy would do the trick? If you're a partisan hack who is just looking for an excuse to grow the government.

Which leads me to my next question, which is, where is the post that you promised us examining the case for/against the Fed targeting NGDP? Inquiring minds want to know! And, perhaps, persuade you that NGDP targeting is actually no worse, and almost certainly better, than the current regime of inflation targeting...

Excuse me, but it seems to me that Krugman has been equally shrill in calling on the Fed to perform to its dual mandate. It is clear our political system (well, calling a spade a spade - the Republican party) is not going to deliver on any fiscal means to aid recovery; the Fed is abdicating its role.

There's no way you can plausibly argue that Krugman has been equally vociferous about Fed action as he is about fiscal stimulus. Sure, he always acknowledges that monetary authorities could do more, but fiscal stimulus is always always always his first option. And that's because he's a big government liberal.

It could be that (1) Krugman recognizes that the Fed is up against the zero lower bound or (2) Krugman thinks that elected representatives should be making policy decisions rather than appointed functionaries at the Fed.

I wonder if Krugman actually still writes his columns. One interesting strategy for a columnist would be to establish a reputation as a columnist and then to give or sell the ability to publish under his byline to someone else. His reputation would slowly erode, but that might be worth it, especially if he had gotten tired of writing columns and was going to stop anyway.

I don't have any evidence for that in Krugman's case, but any good economist would think about that possibility. Indeed, Prof. Cochrane will no doubt think of handing off his blog to someone if he ever gets tired of doing it. And we do that all the time with textbooks, though usually it goes from Samuelson's text to Samuelson and Nordhaus, giving the newcomer at least part credit for doing all the new work.

1) Krugman's column is a popular column designed to provoke. It's perfectly appropriate for him to use strong language in his column. You don't have to read it, if you don't like it.

2) On a different note: You don't think that Paul Ryan is a fiscal phony ? He put out a plan which is strictly based on closing loopholes, yet he refuses to specify which ones. But he is pretty specific about which programs he would cut. What do you call that ? a sophisticated plan? seems phony to me.

3) I don't recall you ever criticizing the conservative side for anything in any of your popular writings. Perhaps I am mistaken.

"On Ryan, I try to criticize things I actually read. I haven't criticized either budget because I haven't read them."

You know Professor Cochrane - Krugman criticizes Ryan for being a faker, you criticize Krugman for calling Ryan a faker and then you admit not reading Ryan's budget. If I did that sort of thing in my line of work I would be laughed at. Apparently, I make my living in a tougher intellectual league than you do.

Ryan is promising to cut tax expenditures but refuses to say which ones he proposes to cut. Until Ryan identifies the specific tax expenditures he proposes to cut: (1) Krugman is right (2) you are wrong and (3) you have no business criticizing Krugman for criticizing Ryan.

I'll be waiting for that blog post, Professor Cochrane, highlighting the reasons you conclude that Mitt Romney's promise to label China a currency manipulator on day 1 is silly and pointless. ... Professor Cochrane, when you bury one statement in a sarcastic comment reply, it does -0- to help with the "optics" you say you care about.

Academic has a very different meaning to the public. It means that morality means nothing to those people who get paid through gov grants to make things we forced buyers would never buy voluntarily. Academic is how these bastards say to their captive customers HAHAHA you can't stop me from robbing you. If I am forced to caugh up taxes for these academics I would feel a little less anger at being mugged if these muggers acted like they believed the BS comming out of their pontificating blow holes

Consider the audacity in the latest FT interview with Krugman: "there is an organised progressive infrastructure now in the way that there was not. It’s tiny and ill-funded, compared with the other side, but it’s actually also smarter than the other side. I certainly feel personally that, although I’m not getting the policies I wanted, I am getting listened to in a way that was not true even two years ago"

John, but how do we deal with the ratchet effect of progressive policies? One does have to be specific when one is going to "snatch food from mouth of babies" or close the loopholes - I mean you have to be concrete in saying who will suffer. But you don't have to be specific about who will pay for it if you just want to "boost the aggregate demand" or create another baby food program.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.

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About Me and This Blog

This is a blog of news, views, and commentary, from a humorous free-market point of view. After one too many rants at the dinner table, my kids called me "the grumpy economist," and hence this blog and its title.
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!